Journal of Economics

, Volume 119, Issue 1, pp 17–45 | Cite as

Relationship-specific investment as a barrier to entry

Article

Abstract

This study constructs a model of a relationship-specific investment in a dynamic framework. Although such investment decreases operating costs and increases the current joint profits of firms in vertical relationships, its specificity reduces the ex-post flexibility to change a trading partner in the future. We demonstrate that whether the investment contract deters entry even in the absence of exclusionary terms depends on not only the specificity but also the efficiency of the investment. We also show that an increase in the investment efficiency does not necessarily improve the equilibrium social welfare.

Keywords

Vertical relation Entry deterrence Relationship-specific investment Switching costs 

JEL Classification

L12 L41 L42 

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Copyright information

© Springer-Verlag Wien 2016

Authors and Affiliations

  1. 1.Faculty of EconomicsKyoto Sangyo UniversityKyotoJapan
  2. 2.Graduate School of EconomicsKansai UniversitySuitaJapan
  3. 3.Department of EconomicsThe George Washington UniversityWashington DCUSA

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